March 15 (Bloomberg) -- The biggest-ever overhaul of
European energy derivatives rules is poised to pit Nasdaq OMX
Group Inc. against the European Energy Exchange AG in Germany as
the share of power handled by bourses increases.

European Union rules taking effect today require utilities
and banks to direct some over-the-counter derivatives they buy
and sell to a central clearing house that guarantees trades.
Nasdaq OMX’s Oslo-based commodities unit wants a bigger share of
clearing in Europe’s largest electricity market and will extend
its range of monthly, quarterly and yearly contracts while
adding German options on March 25, it said this week.

The changes follow the introduction last October of tougher
rules for energy traders in the U.S., where regulators are
leading efforts to increase oversight of OTC derivatives markets
that were blamed for exacerbating the 2008 financial crisis
triggered by the collapse of Lehman Brothers Holdings Inc. In
Europe, companies will be required to report deals to a central
repository to give watchdogs more insight into the 900 billion-euro ($1.2 trillion) OTC power and gas markets.

“There will be something to fight for,” Geir Reigstad, a
special adviser for strategic initiatives in Europe at Nasdaq
OMX Commodities, said in an interview in Essen, Germany. “There
is something in the German market that exchanges haven’t managed
to solve yet. There should be much more cleared volume.”

Biggest Change

Clearing will become mandatory as part of the European
Market and Infrastructure Regulation, or EMIR. The rules will be
phased in over three years to reduce risk. Energy companies with
derivatives positions with a value of more than 3 billion euros
will need to clear their trades, according to the European
Securities and Markets Authority. That limit excludes hedging
transactions, where physical power and gas are sold in advance.

“EMIR is the biggest change to derivatives regulation for
the energy markets since they were liberalized,” said Aviv
Handler, a partner responsible for energy and commodities in
Europe at SunGard Global Services SA in London. He has more than
18 years of experience in energy trading.

As little as 18 percent of the power traded in Europe’s
biggest market is cleared, according to Bloomberg calculations
based on statistics from London’s Energy Brokers’ Association
and EEX.

As much as 64 percent of trading in Europe’s power, gas,
coal and carbon emissions via brokers wasn’t cleared last year,
according to data from London-based Trayport Ltd, which pools
bids and offers from brokers and exchanges onto one screen.

Dominant Operator

“We would be happy to have more exchanges so there is
competition in the market,” Stefan Dohler, head of asset
optimization and trading at Vattenfall AB, Germany’s third-largest power producer, said in an interview in Essen. “At the
same time, there is the danger liquidity becomes too
fragmented.”

Even after 13 years of German futures trading on the
incumbent EEX, buying and selling haven’t gained enough traction
to challenge brokers to overtake them in the way Atlanta,
Georgia-based IntercontinentalExchange Inc.’s ICE Futures Europe
has become the dominant market operator for European Union
emission permits. ICE handled 67 percent of the market last
year, according to Bloomberg calculations based on data from
Leba and ICE. Brokers including ICAP Plc, GFI Group Inc. and
Tullett Prebon Plc still dominate trade in the region’s power
and gas markets with 72 percent of the market in 2011, according
to Prospex Research Ltd.

Griffin Markets Ltd. planned to start an OTC trading
platform for energy in mid-March, the London-based brokerage
said on Jan. 23. Nick Jackson, general counsel at Griffin,
wasn’t immediately available for comment today.

Biggest Reactor

Exchanges such as EEX, based in Leipzig, and Nasdaq OMX
have their own clearing businesses which, for a fee, guarantee
payment and delivery of a commodity in the event of default of a
trading partner. At stake is a slice of Germany’s OTC power
contracts worth 260 billion euros currently handled by brokers,
according to Bloomberg calculations based on Leba volume and
broker prices.

Nasdaq OMX first entered the German power derivatives
market in 2007 without success. The exchange cleared 20
terawatt-hours of German power contracts last year, equivalent
to the output from Germany’s biggest nuclear plant for more than
1 1/2 years. That compares with 1,172 terawatt-hours cleared by
EEX and EPEX Spot SE in 2012, according to the companies’ annual
reports.

Liquidity Providers

The Nordic region, Nasdaq OMX’s home market and where
almost all power transactions are cleared, offers less room for
growth than Germany, Reigstad said last month. He was the head
of the commodities unit until Feb. 8.

Four companies have signed up as “liquidity providers,”
committing to trade an agreed amount of German power, Sara
Aadnesen, a Nasdaq OMX spokeswoman, said by phone yesterday,
declining to identify them.

Traders can reduce the costs of clearing through cross-commodity margining, or netting, which requires less cash to be
posted upfront by companies because they combine offsetting
positions on the same exchange. Nasdaq OMX is hoping to entice
companies like Vattenfall that already trade Nordic power to
move their German power volume to the bourse, Reigstad said.

“Trading and clearing on the same exchange for the Nordic,
Germany and other European markets reduces the margin companies
need to post as collateral and this is attractive,” Dohler
said.

EON SE and RWE AG, Germany’s two biggest utilities, are
trading German and Nordic power on Nasdaq OMX, according to its
website.

Game Plan

ICE Futures Europe, the world’s second-biggest energy
futures exchange, may also start to offer German power
contracts, according to Dohler and Reigstad. If ICE moves into
the German market, the question will be whether there is enough
volume to spread across three exchanges, Dohler said.

ICE, which handles trading in the global Brent crude oil
benchmark, “is strong in hydrocarbons but weak on power,”
Reigstad said. “They must have a game plan.”

The company continuously evaluates new opportunities,
Claire Miller, a London-based spokeswoman for ICE, said by e-mail. “ICE cannot comment on future product strategy,” she
said.

“So far, they have not had very much success in this area
and this is not something that is causing us sleepless nights,”
he said in an interview in Essen. “It is surely something that
we keep a close eye on, as we always do with the international
competition.”